The soaring Swiss franc, up 9%
against the US dollar in the past year, is proving to be a
double-edged sword for Swiss private banking. Client money is
flowing into Switzerland as a safe haven destination and boosting
bottom line figures, but it is raising banks’ operating
costs.
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New money inflows flooding into the
Swiss franc are being attracted by the safety of the Alpine
currency. The Swiss currency is proving, like gold, to be seen as a
safe haven against the continued deep distrust by investors of
conventional investments, say bankers.
Investors are turning to the
trusted franc as doubts continue about the stability of
highly-indebted countries like Greece and Ireland.
66% of Swiss private banking
respondents to a new survey by consultants KPMG believe the euro
crisis has helped them win new assets from clients, confirming the
country’s “safe haven” role.
“We are the island of the happy,”
says Janwillem Acket, chief economist at Bank Julius Baer in
Zurich.
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By GlobalDataAcket says the bank has seen a lot
of turmoil in the dollar and eurozones. Switzerland is being seen
as a safe harbour among clients concerned about stability and the
soundness of government debt in a number of countries, he says.
Cost base increasing:
Cuoni
A veteran Swiss banker, Jean Pierre
Cuoni, chairman of EFG International, Zurich, confirms that the
strength of the franc is indeed helping to build client business.
But that is coming at a cost.
At brokerage Helvea, analyst Peter
Thorne is doubtful whether the benefits of the soaring franc
outweigh the negative.
“A lot of currencies are
depreciating against the franc, but not the cost base of the Swiss
banks. And investors can buy the franc anywhere, not just
Switzerland,” he says.
Cuoni agrees: “We are receiving
dollars, euros, pounds and so on, but our cost base is in the very
strong franc. We have to work hard to ensure our costs are kept
under control.”
The strength of the Swiss franc
against other currencies and erratic client activity was
demonstrated by the way that UBS, although enjoying net new money
flows again in third-quarter 2010, saw gross margins drop to 89
basis points in the third quarter, from 95 basis points in the
second.
Credit Suisse gross margin
falls to 118 bp
At Credit Suisse, the gross margin
in wealth management fell to 118 basis points in the third quarter,
down from 131 basis points for full year 2009.
Clients in Switzerland and
elsewhere often prefer to keep their portfolio in cash because of
uncertainties over equities and in the warnings over “bond
bubbles,” cutting into margins.
According to informed Zurich
sources, Credit Suisse has been enjoying the bulk of the
currency-inspired Swiss inflows, perhaps taking as much as 50%, in
recent months. Bank Julius Baer and Bank Sarasin have taken the
lion’s share of the rest.
New research shows exactly how
Credit Suisse has been flooded by client money at a time when its
troubled rival, UBS, has seen a defection of business. It has
received almost CHF125bn ($127bn) since the end of 2007, despite
the foreign pressure on Switzerland for most of this period,
Bloomberg data shows (see table below).
Swiss banks attract CHF50bn
in aggregate funds
Overall, Swiss private banks
attracted more than CHF50bn in aggregate in the past two-and-a-half
years, a figure which would have been even higher but for the
withdrawal by clients of CHF248bn from UBS.
According to the KPMG study, there
was almost no net money outflow from the 100 Swiss private banks in
its database, excluding UBS and Credit Suisse, on an aggregated
basis in 2009. This is despite the efforts of various countries,
mainly in Europe, to get assets by their citizens repatriated, KPMG
notes.
The KPMG research finds Swiss
private banks upbeat now that the worst of the pressure on
Switzerland, such as the attack on banking secrecy, appears to be
over; 75% of respondents expect the Swiss market to expand over the
next three years.
UBS CFO calls for more
wealth assets before sounding the all-clear
Levels of growth are expected to
remain relatively modest though, with one-third of banks believing
it will be up to 5%, 31% believing it will be between 6 to 10%, and
only 11% predicting growth of between 11 to 25%, the study
found.
Among individual banks, UBS is at
least attracting net new money again, with CHF1.2bn of net inflows
in the third quarter 2010, and attributable primarily to its
growing wealth management operations with Asian and ultra-wealthy
clients.
Analysts cautioned that a small
number of very significant transactions helped swell the reversal
of outflows in the quarter, even though these were the first net
inflows for two-and-a-half years.
UBS chief financial officer John
Cryan said he still wanted to see a number of consistent and
sustainable quarters of net inflows to put the problems of the
bank’s core wealth management business firmly behind it.
Switzerland tackles tax
agreements
Meanwhile, Switzerland is starting
negotiations to reach new tax and banking accords with Britain and
Germany, and so defusing most of the remaining global pressure on
the country and its banking secrecy laws.
“Tax-shy” offshore banking assets
may now be only 15% of the total held in Switzerland, according to
unofficial estimates in Zurich.
Switzerland started to make
concessions from 2009 onwards to avoid being blacklisted as a haven
by the Organisation for Economic Cooperation and Development. The
Swiss hope to get agreement to gather taxes on behalf of foreign
governments without divulging the names of the individuals involved
– on similar lines to the existing withholding tax agreement with
the European Union.
Konrad Hummler, head of the Swiss Private Bankers Association,
said such agreements would ensure tax compliance without forcing
Swiss banks to commit any “treachery” with their clients.
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